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In the 'good' old days (prior to
deregulation), it was kinda sorta simple. You had almost
no choices in airfare at all, and airfare sales were far and few
between. Hmmm - maybe that wasn't all that good, after
all.

The Yin and Yang of the
unregulated
'free' marketplace is that we have a bewildering variety of
fares, which change regularly, both up and down. For
every time this might work to our advantage, there is probably
at least one other time when we end up paying more than we could
(should) for our travels.

This three part article series
hopes to give you the knowledge and understanding to become a
more informed and better shopper when it comes to buying
airfares.

Multiple Factors at Play

There is an interesting
series of conflicts at play when it comes to pricing airline
tickets.

Airlines have a split
personality - they desperately want to sell as many tickets as
possible, but at the same time, they want to sell each ticket for
as much money as possible, and they don't want any cheap tickets
they sell to harm their ability to also sell expensive tickets.

Let's look at things first
from an airline perspective to understand what they do and why.

Airline tickets are notable
for two things in particular - firstly, for the airline, their
services have very high fixed costs but very low variable costs.

Secondly, they are perishable.
That is, once a plane has departed, you can no longer sell any
more tickets on that flight.

Let's consider each issue in
turn and what it means when it comes to the pricing (and timing) of
airfares.

High Fixed Cost, Low Variable
Cost

This means that while it
might cost an airline $30,000 to operate a flight empty other than
for crew between two cities, the extra cost it has to pay for each
passenger who takes the flight is trivial; indeed, these days
with almost nothing included, the variable cost for one more
passenger is little more than the cost of the jet fuel.

For a three hour flight, the
extra cost of adding one more passenger is probably about $10
(with jet fuel at about $3/gallon) or possibly slightly less.

So think about these numbers.
Say this $30,000 flight is on a plane that holds up to 200
passengers. That means, if the flight is full, the airline
has to average $150 per passenger to cover the fixed costs of the
flight and another $10 per passenger to cover the variable costs,
ie, $160 per passenger.

But now look at the 'fine
print' of this sentence.

The first part is 'if the
flight is full'. If the flight is perhaps 80% full rather
than 100% full, clearly the airline has to get more per
passenger for the fixed costs ($187.50 rather than $150).

The second part is 'average' -
the airline needs to average a certain amount. But we
know some passengers pay higher fares than others, so it isn't
necessary for the airline to get exactly the same amount for
every passenger.

The third and perhaps most
important part is that the variable cost per passenger is only
$10. In other words, if the airline sells a ticket for as
little as $20, it still makes money (and more money than we might
think when you add on all the extra fees these days for baggage, a
nice seat, food, and so on).

So, while the airline needs to
sell tickets, on average, for about $200 or so, all included, to cover the cost of its flight and make a small profit, any time
it finds itself with empty seats that it knows it won't otherwise
sell - whether it be the extra 20% of seats between the 80% load
factor it is projecting and the 100% theoretical maximum, or any
part of the 80% which it seems won't sell normally, the airline is
tempted to sell these unsold seats for anything at all. It
is better to get some small contribution from these otherwise
unsold seats than nothing at all.

There are three
counterbalancing factors to this eagerness to fill seats at almost
any price. The first is the airline must be reassured that
by selling a seat at a very low price it won't make it harder to continue to justify its very high prices for other seats on
the same flight.

The second is for the airline
to be sure that the person who is buying the bottom dollar fare
would not be willing to pay more for the fare.

The third is for the airline
to be sure that the flight won't end up oversold, and/or to get in the
unfortunate situation of having sold too many steeply discounted
tickets so that it ends up unable to accept much higher priced
ticket sales.

The airlines approach the
first two issues in a couple of main ways. The first way is
by 'secretly' discounting the flights - for example, by selling
the tickets at low prices to tour operators that will bundle the
tickets in with other travel items such as accommodation, touring,
car rentals, so as to make it impossible to tell how much the
airfare itself cost.

The second way is by creating
all sorts of rules to restrict the fare, limiting its appeal to
only what the airline thinks to be truly bargain motivated
travelers. An obvious type of restrictive rule is a 'no
changes, no refunds' type rule - this makes the fare much less
appealing to a business traveler who typically may wish to make
changes to his itinerary.

As for ensuring that the
flight doesn't end up with too many cheap tickets sold, crowding
out the ability to sell more expensive tickets, the airline does
that through a very sophisticated yield control and inventory
management process that
on a daily (or hourly or even more frequent) basis controls the
numbers of seats available for each fare type, based on past
booking patterns and how the airline projects the flight to
continue to fill up.

These yield management programs can be
extremely sophisticated, and will be factoring in a huge number of
variables, and learning from each previous flight's booking
history to adapt its projections for all future flights.

An ideal scenario for an
airline is to never refuse anyone's attempt to book a flight at
higher fare levels, while at the same time, having the flight
depart with every seat sold, no matter what the fare.

Air Tickets are Perishable

We learned of one duality in
the previous section - airlines need to sell tickets for a certain
average price, but also need to sell as many tickets as possible,
at any price at all. They want their flights to depart full.

There is another duality at
play due to the perishability of air tickets. On the one
hand, the closer to departure of a flight, the more desperate an
airline becomes to fill it up (in theory - you'll never detect the
slightest hint of desperation when talking to a reservations agent
in their (800) reservations center!), because it is getting ever
closer to the point when the flight will depart and they'll no
longer have any more chances to sell tickets on that flight.

But - on the other hand, the
airline also senses that their own desperation to sell tickets
closer to a flight's departure date is matched by increasing
levels of desperation on the part of travelers, who in some cases
have increasingly urgent needs to fly somewhere for some important
reason, no matter what the cost may be.

The airlines would hate to see
those people 'sneak under the wire' and end up getting last minute
bargain fares rather than being trapped into paying last minute
top-dollar prices.

Airlines (and other
sellers of perishable products too) have learned not to discount
their fares too much, closer to departure time, or else their
customers will in turn learn to simply wait until the last minute to buy
their travel needs.

The most extreme example of
this was in the cruise industry. The industry in its early
years of rapid growth found itself trapped in a vicious cycle of
discounting closer to cruise departure to fill empty cabins
(cruises are very similar to air fares - they too have high fixed
and low variable costs for their perishable products), and so the cruising public learned never
to book in advance and to wait for the discounts; while the cruise
lines found themselves increasingly panicky with fewer forward
bookings and greater pressures to discount closer to sailing
dates.

The cruise lines eventually
broke out of that cycle by announcing they would never sell
cruises, close to departure, for less than the original advanced
purchase prices. They've more or less stuck to that
intention for many years now, although there are lots of
'loophole' type exceptions if you go looking for them.

So here is the time tension
the airlines experience : The closer to departure date, the
clearer the indication they have if a flight will be sufficiently
full or not, and the less time they have to sell more seats to
fill it. But at the same time, there are two very different
types of remaining potential passengers - those who will suddenly
discover a need to travel, no matter what the price, and those who
will go on a short notice discretionary trip, but only if the
price is very appealing.

The difficult to answer
question the airlines struggle with - how to get all the 'I need
to travel no matter what the price' passengers, and to gouge them
on their fares as much as possible, while still topping up unsold
seats with passengers who will only travel if the price is
massively discounted?

How the Airlines Play Their
Air Fare Games - And How You Can Play Those Same Games, Too

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Originally published
20 Apr 2012, last update
19 Dec 2013

You may freely reproduce or distribute this article for noncommercial purposes as long as you give credit to me as original writer.